Seasonal Sector Trades: Precious Metals Could Falter
By: Christopher Mistal & Jeffrey A. Hirsch
February 09, 2017
Over the years silver has peaked in February, most notably so in 1980 when the Hunt Brothers’ plot to corner the silver market was foiled. Our seasonal analysis shows that going short on or about February 17 and holding until about April 25 has worked 33 times in the last 44 years for a win probability of 75.0%. As you can see in the short silver table, the usual February silver break was trumped by the overarching precious metal bull market of 2002–2011 just four times in ten years.
[February Short Silver (May) Trade History]
After suffering losses for two years in a row in 2010 and 2011, this trade returned to success with its second best performance in 2012 as precious metals in general fell out of favor. This trade was then successful in 2013, 2014 and 2015. A shaky start for stock markets in early 2016 combined with multi-year lows for silver sparked fresh demand for the metal resulting in a loss last year.
[Silver (SI) Weekly Bars (Pit Plus Electronic) and 1-Yr Seasonal Pattern]
In the above chart, silver’s weekly price bars appear in the top half of the chart and silver’s seasonal trend since 1972 appears in the bottom half. Typical seasonal weakness is highlighted in yellow. Historically, silver has declined from late-February/early-March until the end of June. This year, typical seasonal weakness has yet to materialize, but silver is nearing resistance around $18 per ounce. Silver has also posted a weekly gain for seven straight weeks and appears overbought.
[ProShares UltraShort Silver Daily Bar Chart]
ProShares UltraShort Silver (ZSL) is an inverse (bearish) ETF that seeks to return two times the inverse of the daily performance of silver bullion priced in U.S. dollars for delivery in London and is the choice to trade this seasonality in the Almanac Investor ETF Portfolio. Average daily trading volume can be light, but when silver declines in earnest, trading activity in ZSL does expand quickly. ZSL can be considered on dips below $30 or when silver trades above $18 per ounce. If purchased, employ a stop loss of $27.50.
Gold’s Can Follow Silver Lower
Seasonally, there is also a weak price period for gold from mid-February until mid to late June. Entering a short position on or about February 17 and holding until March 15 has been a successful trade 25 times in the past 42 years for a success rate of 59.5% with a cumulative profit of $43,840 per futures contract. However, in recent years holding onto the short position established in February longer has been more profitable.
[February Short Gold (April) Trade History]
The chart below is a weekly chart of the price of gold with the exchange-traded note (ETN) known as DB Gold Double Short (DZZ) overlaid to show the inverse price correlation between the two trading vehicles. The line on the bottom section is the 42-year average seasonal tendency showing the market’s directional price trend with seasonal weakness highlighted in yellow. DZZ trades 2x the inverse of the daily price change of a single gold futures contract.
[Gold (GC) Weekly Bars (Pit Plus Electronic), DB Gold Double Short ETN (DZZ) Closes and Gold’s 1-Yr Seasonal Pattern since 1975]
As you can see in this next chart, DZZ is declining as gold is still climbing. Gold’s rally is likely to stall at resistance around $1250 per ounce, or about 1.5% higher than its current price. DZZ could be considered on dips below $5.80. If purchased a stop loss of $5.25 is suggested.
[PowerShares DB Gold Double Short (DZZ) Daily Bar Chart]
Both of today’s new trade ideas will be tracked in the Almanac Investor ETF Portfolio.
Disclosure Note: At press time, officers of the Hirsch Holdings Inc., or accounts they control did not hold a position in ZSL or DZZ, but may buy or sell at any time.